Morgans Hotel Group Co. board members faced threats by billionaire Ron Burkle to harm the hotel chain if they didn’t back his acquisition of several of Morgans’s businesses, a lawyer for one of the company’s directors said.

Burkle, whose Yucaipa Cos. is swapping $230 million in notes and preferred stock for ownership of Morgans’s Delano South Beach Hotel in Miami and a restaurant company, “threatened to crater” some of the hotel company’s other deals if directors didn’t accept his buyout bid and offer to backstop a $100 million recapitalization effort, A. Thompson Bayliss, an attorney for a Morgans board member opposing the deal, told a judge today. Burkle also serves on the hotel chain’s board.

“What we have here is business terrorism by Mr. Burkle,” Bayliss told Delaware Chancery Court Judge Travis Laster at a hearing in Wilmington today.

Jason Taubman Kalisman, a Morgans director and a founding member of its largest shareholder, OTK Associates, sued his fellow board members last month over their decision to back the Yucaipa deal and the $100 million rights offering to current investors. OTK owns about 14 percent of New York-based Morgans’s shares, according to court filings.

Proxy Fight

OTK began a proxy fight earlier this year, saying it’s seeking to overhaul Morgans’s board and return the company to profitability. The 13-hotel chain has lost money in every quarter since 2007, according to data compiled by Bloomberg. Kalisman wants Laster to bar the swap and recapitalization from proceeding until after the July 10 shareholder vote.

Last month, Morgans officials agreed to postpone the rights offering until May 16 so Laster could consider Kalisman’s complaints about the deal. OTK and Kalisman accused Morgans’s current directors of rushing to complete the offering before the company’s annual shareholder meeting, originally scheduled for May 15, to avoid losing their seats as a result of the proxy vote.

Lawyers for the Morgans board and Burkle argued today the swap and recapitalization deals are best interests of the hotel company’s investors and shouldn’t be enjoined.

‘Rhetoric, Innuendo’

“An injunction could lead to the breakup of this deal,” Raymond DiCamillo, a lawyer for company directors, told Laster.

Kalisman’s lawyers are relying on “rhetoric and innuendo” to raise question about Burkle’s negotiations with his Morgans board colleagues over the swap and the recapitalization, Bruce Silverstein, the billionaire’s lawyer, said during the hearing.

Silverstein added that Burkle isn’t seeking to gain control of the hotel chain in the $230 million deal, which includes the billionaire’s holdings in Morgans preferred shares and convertible notes. Burkle also will retire warrants and assume an $18 million promissory note as part of the deal.

‘Various Threats’

Kalisman contends in court filings the company’s plan to sell $100 million in stock to existing shareholders at $6 a share could mean Burkle winds up with as much as 32 percent of Morgans’s shares if the rights aren’t exercised in full. He also objects to the sale of the Miami hotel and the Light Group, a restaurant company, to the billionaire in exchange for Morgans notes and preferred shares.

As part of his negotiations over the deal, Burkle “liked to use various threats to try to intimidate” his colleagues on Morgans board, Kalisman’s lawyers said in court filings.

“Burkle repeatedly threatened to litigate to pressure” Morgans officials into a deal, according to a filing unsealed just before today’s hearing. The billionaire also threatened to scuttle deals aimed at having Morgans executives operate hotels in Moscow and Las Vegas, Kalisman’s lawyers said.

Even though he was a Morgans director and a member of the board group responsible for evaluating such transactions, his colleagues “weren’t forthright” about the rights offering’s details and didn’t give him “reasonable notice” that the deal would be considered, Bayliss argued today.

The Morgans chain features boutique hotels such as the Mondarian SoHo in New York, the Clift Hotel in San Francisco and the Delano Marrakech in Morocco.